PASO FEDERAL & INDIAN ROYALTY
COMPLIANCE WORKSHOP
COPAS Spring MeetingShreveport 2017
Bob Wilkinson
April 27, 2017
DISCLAIMER
This presentation only reflects the views of
the author/presenter and is not intended as
legal, tax or accounting advice.
Each recipient should solicit their own legal,
tax or accounting counsel with respect to
any of these issues.
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PURPOSEAt the end of this presentation, the attendee
will be aware of the royalty compliance
information that was presented at the PASO
Federal & Indian Royalty Compliance
Workshop on February 8 & 9, 2017.
Link to presentations:
http://paso-tulsa.org/royalty-auditcompliance-workshop-2/
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USEITI reporting via “Mainstreaming”
No formal reconciliation expected for the
2017 report (2016 Revenues)
ONRR/BLM will use their data to report the
2017 revenue information
Companies may want to check what ONRR
reports for “reasonableness”
USEITI – Greg Gould
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ONRR creating an “Indian Energy Service
Center” with the BIA being the lead
ONRR Enforcement staffing reorganized,
splitting the Appeals & Regulations from the
Enforcement efforts
ONRR Update – Jim Steward
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Companies cannot fulfill their dual
accounting requirement until after the major
portion prices are published
Indian gas major portion pricing will continue
to be published in the summer, but it may
take even longer with new administration
Indian Compliance – John Barder
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Training – the royalty and production training will
no longer be in the same week
Will be in the fall, and will be more interactive
ONRR looking to extend the hours you can
access their system, trying to go from 5pm to 7pm
Their system does not handle cross lease netting.
You need to be proactive and let them know
ahead of time. Your reporting must be on the
same report
Financial Management – Lorraine Corona
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ONRR did not take into account COPAS’s (or
rest of industry) comments on the rule
Eliminates some actual transportation and
processing costs (were previously allowed)
impacting the profitability of those properties
Default provision gives ONRR a lot of latitude
in assessing additional royalties, eliminating
certainty for industry
Federal Valuation Rule – Bob Wilkinson
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Sales type code changes for field fuel and ngls –
need to match how they are being valued
S&P BBB bond rate now available for free
No more netting of transportation factors – you
can no longer net purchaser incurred
transportation costs, but new regulation does not
provide the ability for you to include these costs
in your transportation & processing allowances
Federal Valuation Rule – Bob Wilkinson
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ONRR does not value all non-sold products
the same way (field fuel, keepwhole,
vent/flare)
Index pricing should be available for arms-
length sales (they have the same tracing &
unbundling issues)
Index price used and standard deducts need
to be more current and revenue neutral
Federal Valuation Rule – Bob Wilkinson
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You had to unbundle POP contracts prior to
the new valuation rule
Low volume fees – They do not allow
measurement costs or any type of penalty,
but they do allow “firm demand” and “capacity
reservation” fees
ONRR guidance not as stringent as Valuation
Determinations
Must/should you revert back for everything?
Federal Valuation Rule – Amy Lunt
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Data Mining does not use thresholds
Indians are first priority
ONRR cannot accept royalties on an
unapproved agreement
BLM has backlog on approving CAs
ONRR does not look at dual accounting until
after major portions
Data Mining – Lorraine Corona
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In new rule, maintenance is not as broadly applied
as the proposed rule provided
Removed virtually all of industry’s concern
Distinguishes maintenance of incorrect information
from simple failure to correct misreporting
They do not use the max penalty rates very often
Penalties in the past year were a record low
Knowing or Willful will most likely be used in
situations where there is failure to pay, failure to
permit an audit, and false reporting
Civil Penalties – Geary Keeton
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API filed lawsuit on ONRR’s Federal Valuation Rule
o Default provision gives broad authority to
retroactively increase royalty owed
o Lack of transparency
o Eliminates certainty
o Requires all contracts to be in writing
o Doesn’t allow all transportation/processing costs
o Index pricing has flaws
There has been a ton of regulations the past two
years, and a reduction to holding lease sales
Legal Challenges – Schaumberg/Sgamma
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Congressional Review Act
o Allows Congress to disapprove rules subject to
Presidential signature or veto.
o Only used once before successfully
o There are timing limits
o Only majority vote needed during first 60 days of session
o Disapproved rule never takes effect
o Agency may not issue a rule that is substantially the same
o CRA prohibits judicial review
o All the recent ONRR & BLM rules can be addressed via
the CRA, Senate priorities are likely to dictate which rules
are ultimately considered for disapproval
Legal Challenges – Matt Haynie
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Unrealistic deadlines
o Standard deadline is 30 days
o Extensions may be granted
o Contacts were given in situations where there are
overlapping work assignments
Preliminary Determinations are still a preliminary
document prior to an Order being issued
Common Audit Issues – Panel
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Training – you only have to walk through 1 month,
you don’t have to go through every month
You don’t have to officially sign your documents
Common Problems for Federal Auditors
Simply paying on statement values (not
unbundling);
Hidden fees being deducted;
Failure to maintain contract amendment information
Common Audit Issues – Panel
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Marketable condition application has evolved from
wellhead/entrance into field transportation system
to the interstate pipeline, and may be downstream
of the point of sale
Applies to fixed fee, keepwhole, POP contracts (?)
ONRR’s unbundling is a one-size fits all approach
and may not fairly represent your gas, fees or
contract
Unbundling – Judy Matlock
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Accounting department does not have all the
information, it requires a team to unbundle with reps
from operations, marketing and legal, and strong
support from management
Largest components of disallowed costs are for
compression and associated fuel
If you owe a lot of money for applying unbundling
historically, ONRR has an installment plan although
interest keeps running
Unbundling – Judy Matlock
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Largest components of disallowed costs are
for compression and associated fuel
It is hard to get the 3rd party service providers
to unbundle or to negotiate unbundled
contracts because you have no leverage.
You may be able to get some pieces
unbundled.
Unbundling – Judy Matlock
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ONRR does not make public the
assumptions, plant data, and operating
condition utilized to generate their UCA’s
Condition of the producer’s production at the
point of delivery may not match the
assumptions utilized by ONRR
Unbundling – Mark Lambert
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The lessee is responsible for unbundling
If you do not own the plant/system, you have the option
to use their UCA to unbundle
ONRR provides valuation guidance, reviews industry’s
and state/ONRR auditor unbundling efforts, and
publishes UCA’s but they do not approve unbundling
efforts or new methods
ONRR close to completing 1 or 2 standard onshore
UCAs (can use for arms-length situations where no
UCA exists)
ONRR is looking into adding 1-2 hour unbundling
training in their Reporter training
Unbundling – ONRR
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ONRR’s UCA guidance documents say there are other
methods to unbundle
Carve out methodology most consistent with the regulations,
case law, is the easiest and least costly to calculate
Only disallows costs to place the gas into marketable
condition once (allows all transportation & processing costs)
Carve out methodology reduces the amount of information
needed from the 3rd party service providers
Carve out methodology cannot be used on company
operated systems and may not work on systems where the
rates are based upon a cost of service or POP contracts
Unbundling – Bob Wilkinson
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ONRR recognizes that the pressure
differential is the correct denominator and
have updated their “How to calculate a
Processing UCA” guidance document but
they are not willing to go back and correct
their UCAs
ONRR says it is optional to use their UCAs
Marketable Condition Discussion
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Marketable Condition Discussion
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https://www.youtube.com/watch?v=t8XMeocLflc
ONRR’s UCA’s include several incorrect
mathematical and engineeringly incorrect
assumptions (tailgate boosting is never allowed;
you must place gas in marketable condition both
before and after processing; compressor discharge
vs pressure differential).
If you have used ONRR’s UCAs and want to file for
refunds, there is a 6 year statute of limitation
Marketable Condition Discussion
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ONRR’s marketable condition application is inconsistent with
the regulations & recent court cases
ONRR recognizes their current unbundling method used in
the published UCAs is not supported by Devon (but their
guidance documents say their UCAs follow Devon)
ONRR says they can be challenged on their position that
boosting is never allowed
ONRR says they have some court cases that will address
whether gas has to be placed in marketable condition first is
correct or not
Marketable Condition Discussion
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You will be required to report the new FMP
numbers on the OGOR as a result of
implementing Onshore Orders 3, 4 & 5, and
there will be edits
FMP numbers are specific to each product
For the First month you split an oil ending
inventory to many FMP numbers, ONRR
plans to override the error messages
Production Reporting – LeeAnn Martin
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You will not have to report non-royalty
bearing vented or flared volumes on the
ONRR 2014
6 new Disposition Codes to be used on the
OGOR for reporting vented & flared volumes,
although it is unknown when they will be
required
Vented & Flared Reporting – LeeAnn Martin
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Many changes made to the proposed rule
(longer phase-in, compliance over county or
state wide, more exemptions, some
additional equipment dropped), although still
too costly or restrictive for industry
Identified when royalty free use does not
require BLM approval, and when it does
Commingling/off-lease measurement/royalty
free use off-lease, require separate approvals
BLM Venting & Flaring Rule – Tim Spisak
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Must have separate FMPs for royalty free
use of gas downstream of FMP
Until new Disposition codes are created
(ONRR says it may be a while since their rule
may be disapproved) use DC 20
Operator may choose to comply with capture
requirement on a lease-by-lease, county-
wide, or state-wide basis (BLM expects most
operators to choose state-wide basis)
BLM Venting & Flaring Rule – Tim Spisak
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Obtaining FMP numbers delayed 4 months
as their system is not in place
Operator only obligated to apply for the FMP
number within the required timeframe.
BLM will send the operator a listing of their
properties and when they must file for FMP
number
Gas and oil facilities must have their own
FMP number
BLM Onshore Orders 3, 4, 5 – Rich Estabrook
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BLM can access penalties to any person
(purchasers, transporters, processors), not
just the operators
All measurement must not be commingled
with gas originating from other sources
unless approved by the authorized officer
BLM has provided training on the new
Onshore Orders in MT, NM, OK, WY and
have one scheduled for ND on May 10
BLM Onshore Orders 3, 4, 5 – Rich Estabrook
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